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The annual AICPA¹ conference features insights from numerous speakers on current accounting, reporting and auditing practice issues. Below is an excerpt from Deloitte’s Heads Up “Making Disclosures, Checking Them Twice—Highlights of the 2014 AICPA Conference on Current SEC and PCAOB Developments,” which features brief highlights of remarks made by selected speakers and panelists² at this year’s conference, which took place December 8–10 in Washington, D.C.

IFRSs

With anticipation building in the weeks preceding the conference about whether news would be forthcoming regarding the incorporation of IFRSs into the U.S. financial reporting system, James Schnurr, chief accountant in the SEC’s Office of the Chief Accountant (the OCA), discussed a possible fourth alternative³ for consideration. Indicating that “some domestic issuers may, now or in the near future, prepare IFRS-based financial information in addition to the U.S. GAAP based information” in their filings, Mr. Schnurr spoke about a plan to consider whether U.S. companies should be permitted to voluntarily provide IFRS-prepared financial information as a supplement to their U.S. GAAP financial statements. The information from this fourth alternative could range from selected IFRS financial information to full IFRS financial statements. Mr. Schnurr further noted that “[u]nder this line of thinking, issuers that do not believe IFRS-based information would be beneficial to investors would not be forced to undertake what we understand to be, in some cases, significant implementation costs.“

In addition, Mr. Schnurr indicated that the goals of providing investors with comparable and high quality decision-useful information remain paramount and recognized that “any continued uncertainty around IFRS results in uneasiness for investors across the globe. Therefore, it is a priority … to bring a recommendation to the Commission in the near future with the hope of resolving, or at least lessening, this uncertainty.”

New Revenue Recognition Standard

Other speakers provided their views on practice issues related to current and future GAAP, including implementation issues arising from the new revenue recognition standard, and acknowledged the efforts of the FASB and IASB—particularly of their joint transition resource group (TRG)⁴ on revenue recognition—to address questions that have been raised by domestic and foreign constituents. Noting that monitoring the implementation of the new revenue recognition standard is a high priority for the OCA, Mr. Schnurr stated that “the Staff respects reasoned judgments, but where significant diversity in practice exists, [the OCA seeks] to eliminate that diversity.” He also reiterated the importance of achieving comparability and reducing practice differences by addressing “potential diversity in practice on the front end of the implementation effort” to avoid what are likely to be significant post-implementation costs.

In addition, FASB Chairman Russell Golden noted that on the basis of feedback received from the TRG, the FASB has instructed its staff to conduct research related to a potential agenda project. He indicated that the project would take into account application issues and the need for additional (or clarified) guidance on (1) intellectual property transactions (i.e., licenses), (2) identifying performance obligations, and (3) determining whether an entity is a principal or an agent (i.e., whether an entity should present revenues on a gross or net basis). Mr. Golden stated that he anticipates that the revenue TRG “will serve as a prototype for other such groups as [the FASB prepares] to issue major standards.” Further, as it announced at the October 2014 revenue TRG meeting, the FASB is researching whether to delay the effective date of the new revenue standard and expects to decide by mid-2015.

SEC Staff Speeches

Professional accounting fellows in the OCA spoke at the conference this year for the first time in several years. They addressed a number of topics, including (1) identification and reporting of material weaknesses in ICFR, (2) errors in the statement of cash flows stemming from less complex topics in accounting guidance, (3) amendments to or exchanges of equity-classified preferred stock, (4) derivatives and hybrid financial instruments, (5) business combinations and pension accounting, (6) determination of the primary beneficiary in variable interest entities (VIEs) for consolidation purposes and (7) revenue recognition—primarily regarding principal-agent assessments in arrangements with more than two parties.

Referring to what has been commonly called “speech GAAP,” Dan Murdock, deputy chief accountant in the OCA, stated that speeches by members of the SEC staff are meant to provide transparency into how the staff analyzes complex accounting matters rather than “absolute answers” to accounting questions because accounting conclusions are based on a transaction’s particular facts and circumstances. Further, Mr. Murdock cautioned registrants against overreliance on SEC staff speeches—as well as on any other nonauthoritative guidance—in setting their accounting policies because U.S. GAAP changes, and SEC staff views tend to evolve over time. He further expressed his view that a staff speech has a shelf life that expires in, perhaps, five years, noting that there is no substitute for thoughtful analysis that takes into account the principles in authoritative guidance and reflects an understanding of what standard setters sought to achieve.

Disclosure Effectiveness

In addition to fulfilling the SEC’s mandated rulemaking activities under the Dodd-Frank Act and the JOBS Act, the SEC staff in the Division of Corporation Finance (the “Division”) has been focusing on its disclosure effectiveness initiatives. The Division staff recapped the activities planned for its disclosure effectiveness project,⁵ stating that it is currently evaluating Regulations S-K and S-X⁶ for improvement and that it hopes to issue a concept release (as part of what may be a series of concept releases) in the near future. Representatives from the FASB and IASB also provided updates on their disclosure effectiveness efforts—including their conceptual framework projects and other simplification projects—which may reduce differences between U.S. GAAP and IFRSs.

In addition, the staff indicated that it would focus on proxy reporting in a later phase of the project. Further, Mr. Schnurr noted that he has devoted a significant amount of time on audit committee reporting since assuming his role in October 2014, and that the “OCA staff has been working closely with staff from [the Division] and others throughout the Commission to consider [the SEC’s] existing disclosure requirements, current audit committee disclosure practices and publicly available observations and commentary.”

As did other presenters at the conference, the Division staff discussed how, in the absence of specific requirements, registrants can improve their disclosure documents in the near term and how they can better focus their disclosures on matters that are material and relevant to their operations, liquidity and financial condition.⁷

The Division staff noted that whether they are about critical accounting estimates, results of operations or other matters, effective (and compliant) MD&A disclosures are those that appropriately identify and explain material known trends and uncertainties.⁸ The staff cited material operations in Venezuela, recent updates to mortality tables, and decreasing oil and gas prices as examples of items that may represent material trends and uncertainties requiring analysis in a registrant’s MD&A.

Audit and Auditor Considerations

As part of its plan to increase transparency and improve audit quality, the PCAOB expects to continue to (1) analyze the effectiveness and results of inspections, (2) enhance the usefulness of its inspection reports, and (3) work to advance its standard-setting agenda. Addressing concerns from SEC representatives about how standards have been prioritized because of standard-setting delays, a PCAOB staff member highlighted that the PCAOB has strived to ensure that it undertakes full due process—including performing extensive cost-benefit analyses—in its standard-setting efforts and noted that such activities are time-consuming.

The PCAOB staff indicated that it has made progress conducting international inspections and that it continues to work with its foreign counterparts to gain access to additional countries, and it identified deficiencies in approximately one-third of its inspections of prior-year audits that were referred to foreign auditors. Despite citing improvements in domestic inspections, the PCAOB staff stated that it has continued to identify deficiencies associated with audits—including revenue recognition, inventory, goodwill and intangible assets, and business combinations. In addition, it has identified deficiencies in auditors’ testing of ICFR and of management estimates.

Brian Croteau, deputy chief accountant in the OCA, also stressed the importance of auditor independence to auditors, management of companies and audit committees. He stated that nonaudit services should be monitored to avoid “scope creep” and noted that scope creep can occur during the delivery of otherwise permissible nonaudit services when engagement activities deviate from the intended scope and thus become impermissible, impairing auditor independence. Representatives from the PCAOB also cited their efforts to educate audit committees, namely by developing audit quality indicators.

Many of these topics, as well as others from this year’s conference, are discussed in the full Heads Up, and include issues related to business combinations, consolidation, equity, fair value, financial instruments, goodwill impairment, income taxes, materiality, pensions and other postretirement benefits, revenue recognition, segment reporting, statement of cash flows, as well as other accounting and financial reporting matters, such as spin-off transactions, financial statements included in initial public offerings (IPO), pre-IPO valuations of stock for share-based compensation arrangements, definition of a joint venture, software development costs, and standard setting remarks from FASB Chairman Russell Golden and IASB Vice Chairman Ian Mackintosh. Also covered are auditing developments, and other topics, such as conflict minerals and integrated reporting.

—Produced by Deloitte & Touche LLP’s National Office Departments of Professional Practice

Endnotes1. Abbreviations and short forms used in this publication are defined in Appendix B in the full Heads Up.2. For a list of panelists and selected sessions, see Appendix C in the full Heads Up.3. Alternatives already under consideration by the SEC regarding the use of IFRSs in the United States include (1) adopting IFRSs outright, (2) giving U.S. registrants the option of filing IFRS financial statements, and (3) using the so-called “condorsement” approach.4. The joint TRG on revenue recognition was formed to discuss and analyze potential issues that preparers may face when implementing the boards’ new revenue standard.5. In December 2013, in a report provided under the JOBS Act, the Division staff indicated that the SEC would commence a broad effort to modernize and streamline its rules and regulations (also called its “disclosure effectiveness project”). For additional information, see Deloitte’s August 26, 2014, Heads Up.6. For the full titles of standards and other literature cited in this publication or links to them, see Appendix Ain the full Heads Up.7. The SEC staff has discussed this topic in various speeches over the past year. For more information about the staff’s remarks, see Deloitte’s October 16, 2014, March 20, 2014, and December 16, 2013, Heads Up newsletters.8. Under Regulation S-K, Item 303(a)(3), registrants are required to disclose in MD&A material known trends or uncertainties that may affect future performance (whether favorable or unfavorable).

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